Pricing peculiarities of the UK petrol market

Abstract

The UK petrol market has experienced, over the last two decades, intense price competition and as such provides a rich source of information on some of the real‐world issues in pricing. Examines the practical mechanisms that have been used in managing price competition and also some of the peculiarities of this market. The petrol retailing market is found to adhere broadly to classical theory of price competition but its special characteristics cause interesting deviations. Of particular note, a “leverage effect” operates whereby price changes affect margins much more than volumes, which leads to behaviour by oil competitors which seems counter‐intuitive. In addition, real‐world issues – such as the price adjustment process and the local nature of competition – present practical difficulties which can have a material impact on the profitability that a textbook exposition of pricing might lead us to expect.